Highlights
- Credit reports include information about a rental applicant’s payments on credit cards and loans
- Credit reports can help identify red flags like overdue payments, delinquent accounts, collection items, and bankruptcies
- Apartments.com partners with TransUnion to provide you with an overview of a renter’s credit history to help you screen potential tenants
- The Fair Credit Reporting Act allows renters to know if their credit report is being considered against them
Introduction to Credit Reports in Tenant Screening
Screening tenants is an important step in the leasing process to minimize the risk of late rent payments, evictions, and property damage. A credit report is a component of a tenant credit check that provides an overview of an applicant’s financial activity. A credit report is essential in screening tenants; reviewing an applicant’s credit report can help you predict the likelihood of on-time rent payments.
Apartments.com partners with TransUnion to offer seamless tenant screening, including a comprehensive credit report and background check. This one-stop screening can relieve the stress of filtering through tenant applications.
What Is a Rental Credit Report?
A credit report summarizes a rental applicant’s payment history and any active accounts. It includes the applicant’s total debt, payment history, and any active lines of credit.
Components of a credit report
The specific format of a credit report varies depending on the credit bureau it comes from, but all credit reports contain the same general information. A credit report includes personal information, employer history, accounts, and credit inquiries.
A credit report's personal information and employer history sections help verify a rental applicant’s identity. Personal information includes a rental applicant’s name, Social Security number, date of birth, address, and phone number. Employer history may not be comprehensive, but it can still help verify an applicant’s identity and ability to pay rent.
The accounts section of a credit report provides details about an applicant’s payment behavior on credit cards and loans. The accounts section is divided into Adverse and Satisfactory accounts. Adverse Accounts include derogatory marks like delinquent accounts or collection items and show up to seven years of delinquent history. The Satisfactory Accounts section shows payment history on current or paid-in-full accounts, including late payments on open credit cards or loans.
The credit inquiries section shows up to two years of hard credit inquiries that an applicant authorized when applying for a credit card or loan. Hard inquiries decrease a credit score slightly because they show that a loan applicant is taking on more debt. Credit reports do not show soft credit inquiries a person pulled for their own reference.
See below for an example credit report:
How to Read a Tenant’s Credit Report
Apartments.com makes it easy to screen tenants and understand their credit history. The TransUnion ResidentScore provides a numeric rating of an applicant’s risk level.
Understanding credit scores
A credit score is a numeric rating of a renter’s financial responsibility, largely impacted by debt repayment. While each of the three credit bureaus–Equifax, Experian, and TransUnion—calculate credit scores differently, they all consider similar factors. Generally, credit scores consider payment history, length of credit history, types of credit, the number of active accounts, and the ratio of used credit to available credit.
A credit score ranges from 300 to 850, with 850 being the best possible score. A credit score of 690 is generally considered “good,” while anything below 629 is considered a bad credit score.
It’s important to understand that while “credit report” and “credit score” are often used interchangeably, they are different. According to the Consumer Financial Protection Bureau, a credit score is a numeric summary of a renter’s credit history. In contrast, a credit report is a detailed account of a renter’s credit activity.
Analyzing payment history
Payment history is one of the main factors that impact a credit score, and a credit report shows payment history on credit cards, loans, and other accounts.
Payment history will show:
- Whether credit cards, loans, and other accounts were paid on time
- Any overdue payments
- The amount of money still owed on delinquent accounts or collection items
- How much time has passed since delinquent accounts or collection items were introduced
- Public bankruptcy records
A rental applicant’s payment history can give you an idea of how likely they are to pay rent on time. If an applicant’s payment history shows multiple overdue accounts and derogatory marks, they may be a riskier tenant than an applicant with a perfect payment history.
Assessing debt-to-income ratio
While a debt-to-income ratio is not included on a credit report, it’s important to consider when screening applicants. Since your rental application likely requires applicants to disclose their gross monthly income, you should be able to easily calculate their debt-to-income ratio with the information provided on their credit report.
According to the Consumer Financial Protection Bureau, a debt-to-income (DTI) ratio is calculated by recurring monthly debt divided by gross monthly income. Chase says lenders consider a good DTI ratio at or below 43%.
A high DTI ratio signals that an applicant may be unable to take on more debt, while a low DTI ratio shows that an applicant can afford new monthly payments. DTI is typically used to help lenders determine a loan applicant’s risk level, but DTI can also help landlords assess whether a rental applicant can afford monthly rent payments.
What Should Landlords Look for in Credit Checks?
Key indicators of a good tenant include a credit score of 690 and above, a debt-to-income ratio at or below 43%, and a reliable payment history. However, credit reports can reveal more than an applicant’s credit activity.
Red flags in credit reports
Credit reports help predict an applicant’s rent payment behavior and identify potential warning signs that may require further investigation. Some red flags include long payment gaps, significant debt, delinquent accounts, and derogatory marks such as collections, repossessions, or bankruptcies.
Fair Credit Reporting Act
The Fair Credit Reporting Act (FRCA) gives renters the right to know if anything in their credit report is being considered against them. This allows applicants to dispute inaccuracies before you decline their rental application.
Adverse action notice
While credit checks can help you avoid problematic renters, applicants are entitled to know that something in their background check was significant enough to deny their application. Adverse action notices are a best practice to implement to remain transparent and professional.
Here is an example of an adverse action letter:
[Applicant’s Name]
[Applicant’s Address]
Dear [Applicant’s Name]
Thank you for your recent application to [Property Name]. Unfortunately, we are currently unable to accept your application for the following reason(s):
- Credit score does not meet minimum
- Unable to verify income
- Excessive debt compared to income
- Irregular employment
- Insufficient credit history
Please Note: If your application has been rejected due to insufficient credit, you have the right under the Fair Credit Reporting Act to request a free credit report through [Screening Service Used] or dispute inaccuracies.
To dispute or appeal this decision, please contact [Owner’s Name] by email at [Owner’s Email], by phone at [Owner’s Phone Number], or by sending a written letter to [Owner’s Address] within [Number of Days] of receiving this notice.
Download this PDF for an Adverse Action Letter template.
An adverse action letter is not a rejection letter. An adverse action letter gives an applicant the opportunity to dispute any incorrect information on their credit report or negotiate concessions with you. You may be able to come to an agreement and require a co-signer or guarantor on their lease or charge a higher security deposit.
Enhancing Tenant Screening with Apartments.com Credit Screening
When you list your rental with Apartments.com, residents can apply directly from your listing. The rental application will collect all the information you need to make an informed decision about signing a lease with an applicant.
TransUnion’s ResidentScore
Apartments.com partners with TransUnion to provide you with a ResidentScore. A ResidentScore, like a credit score, summarizes a rental applicant’s credit activity. However, while a credit score is designed to help lenders identify the risk of a loan applicant, TransUnion’s ResidentScore focuses on an applicant’s rental history to predict their behavior as a tenant. TransUnion reports that a ResidentScore identifies 15% more evictions and can score residents with a thin credit history.
A ResidentScore ranges from 350 to 850, with 850 being the best possible score. A ResidentScore considers total payment history, credit history, the amount of credit being used, the amount of available credit, and hard credit inquiries. A ResidentScore does not consider an applicant’s income, so it does not include a debt-to-income ratio in calculations.
Screening potential tenants is a crucial step in the leasing process, and understanding how to read a credit report can help you avoid tenants who don’t pay their rent on time. By analyzing a credit report and being transparent with applicants, you can find high-quality tenants and maintain professionalism.
While the tenant screening process can be daunting, Apartments.com makes credit checks easy with the one-stop screening that includes a TransUnion ResidentScore, which rates a rental applicant’s risk level. This streamlined screening process makes background checks easy so you can focus on making your rental a great place for your future tenant.
